Recently,youaretaskedbyyourmanagertoevaluatetheinvestmentpotentialof2stocks,StockAand Stock B.Thecost ofequityis 8%forboth StockAand Stock B.

Thefollowingexpecteddividendpaymentsforthefollowingyearsareasfollow:

	ExpectedDividend
Year	StockA	StockB
1	$5.00	$2.00
2	$6.00	$3.00
3	$6.20	$4.00
4	$6.40	$4.20
5	$6.60	$4.40

1. Estimate the dividend growth rate from year 6 onwards for both stocks . Justify your estimation approach.

(5marks)

1. UsingGordonDividendGrowthModeandyourestimationofthedividendgrowthrates,determinethevalueofStock Aand B.

(10marks)

1. Whichstockshouldyourecommendforinvestment?Justifyyourrecommendations.

(5marks)